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WHAT IS THE CPI?
2.11 The scope of the PBLCI is households whose principal source of income is from government pensions and benefits (i.e. age pensioner and other government transfer recipient households).
HOW IS THE CPI USED?
The CPI is used as a macroeconomic indicator and for adjusting dollar values
2.12 The CPI affects almost all Australians because of the many ways in which it is used. The two most common uses of the CPI are:
There are many different price indexes available
2.13 Although the CPI is the best known price index, it is but one of many produced by the ABS. Examples of other price indexes include:
2.14 Having determined that a price index is required for a particular application, it is important to carefully consider the range of available indexes and select the index which best meets the specific requirement. While the ABS can provide technical and statistical guidance, it does not provide advice on indexation practices and it cannot tell users which index they should use. These are matters for users to determine.
2.15 For a general description of the range of issues that should be taken into account by parties considering an indexation clause, see 'Use of Price Indexes in Contracts' at https://www.abs.gov.au/websitedbs/D3310114.nsf/home/Inflation+and+Price+Indexes+-+Use+of+Price+Indexes+in+Contracts
THE CPI BASKET OF GOODS AND SERVICES
CPI basket based on 2015-16 HES data
2.16 The composition of the CPI basket is based on the pattern of household expenditure in the 'weight reference period', which is 2015-16 for the 17th series CPI. Information on the spending habits of Australian households during 2015-16 was obtained from the Household Expenditure Survey (HES) conducted by the ABS, as well as from other data sources including National Accounts estimates. The HES results provide the starting point for selecting the basket of goods and services to be priced for the CPI.
CPI basket includes items representative of all consumer goods and services
2.17 For practical reasons, the basket cannot include every item bought by households but it does include the most significant items. It is not necessary to include all the items people buy since many related items are subject to similar price changes. The idea is to select representative items so that the index reflects price changes for a much wider range of goods and services than is actually priced. Examples of the types of items included in the CPI basket are shown in Appendix 2.
2.18 When determining what items are to be priced for the CPI basket, various factors are taken into consideration. Items:
2.19 Income-based taxes, however, are not included in the CPI because they cannot be clearly associated with the purchase or use of a specific good or service.
The CPI groups
2.20 The total basket is divided into 11 major groups, each representing a specific set of commodities:
2.21 These groups are divided in turn into 33 sub-groups, and the sub-groups into 87 expenditure classes. An expenditure class is a grouping of similar items, such as various types of motor vehicles. See Appendix 1 for a full list of groups, sub-groups and expenditure classes and the figure at 4.1 for an illustration of the CPI structure.
THE RELATIVE IMPORTANCE OF CPI ITEMS
2.22 The overall (or All groups) CPI provides a measure of the average rate of price change. In calculating an average measure of this type it is necessary to recognise that some items are more important than others. Price changes for the more important items should have a greater influence on the average rate of price change than price changes for less important items. The relative importance of the goods and services in the CPI is determined by the relative household expenditure on each product. For example, how much more households spend on rent than automotive fuel on average.
2.23 Measures of expenditure on each of the CPI groups, sub-groups and expenditure classes were most recently updated with the introduction of the 17th series CPI in the December quarter 2017. The 2015-16 HES was the primary data source for updating the weights. However, some adjustments were made to HES data to account for known instances of underreporting (the most notable being for alcohol and tobacco), as well as scope, coverage and measurement differences. The adjusted HES data were then used to derive a ‘weight’ for each expenditure class.
2.24 The CPI weights reflect the relative expenditures of the CPI population group as a whole and not those of any particular type or size of household. The weights reflect average expenditure of households and not the expenditure of an 'average household'. The household average weekly expenditure and corresponding 17th series CPI relative weights for the CPI groups are shown in Appendix 1.
Basket is fixed in terms of underlying quantities at the expenditure class
2.25 Although the weights are expressed in terms of expenditure shares, it is not the expenditure shares (where expenditure is given by the product of quantity and price) that are held constant (or fixed) from period to period. What are held constant are the quantities of products underpinning these expenditures such as the number of litres of petrol purchased each period on average by households. Weights are presented in expenditure terms because it is not possible to present quantity weights in a meaningful way, e.g. the quantity of health services. The relative expenditure shares of items will change over time in response to changes in relative prices.
Weights below the expenditure class can be varied
2.26 While the implicit quantity weights are held constant at the expenditure class level, the weights of items within an expenditure class (e.g. different types of bread) can be varied between periodic reviews to reflect changed purchasing patterns. Any weight changes are introduced into the CPI in such a way as to not affect the level of the index.
Update of fixed weights
2.27 The average household weekly expenditure and weights for the CPI expenditure classes have previously been updated at six-yearly intervals with the timing generally linked to the availability of HES data.
2.28 From the introduction of the 17th series CPI in the December quarter 2017, the expenditure class weights are now updated annually. The HES will continue to be used as the primary data source to re-weight the CPI in the years where it is available, currently six-yearly. In inter-HES years, the principal data source for updating the weights will be Household Final Consumption Expenditure (HFCE) data from the National Accounts. The December quarter 2018 will be the first instance where HFCE data is used as the principal data source for the CPI re-weight. For further information, refer to Information Paper: An Implementation Plan to Annually Re-weight the Australian CPI, 2017 (cat. no. 6401.0.60.005).
COLLECTING PRICES FOR THE CPI
2.29 Several modes of collection are used by the ABS to obtain prices for the Australian CPI, including:
2.30 Personal visits are made by trained and experienced ABS staff, who observe actual marked prices as well as discuss with the retailers matters such as discounts, special offers and volume-selling items on the day. ABS staff record this information on the spot using mobile devices. The regular personal visits also enable ABS staff to continually monitor market developments such as market shares or possible quality changes. This information is used in maintaining the representativeness of the samples and assessing quality change.
2.31 Online pricing represents a more cost effective mode of collection with lower respondent burden compared to pricing through personal visits. As a result, online price collection is increasingly being used as it is becoming more common for prices in store to match the prices listed online. Prices are also collected online where this is the predominant method consumers use to purchase a particular good or service, for example, domestic and international airfares.
2.32 The ABS is increasingly using web scrapers to collect online prices. Web scrapers automatically collect all items and prices on a retailer's website. As the process can be run as frequently as desired, data collected via web scraping represents a 500 fold increase in the number of prices collected compared with manual price collection.
2.33 The ABS is also utilising transactions data as a method of obtaining prices for use in the CPI. Transactions data is high in volume and contains detailed information about individual transactions including: date of purchase, quantities purchased, product descriptions, and value of products purchased.
CPI goods and services priced at many different types of outlets
2.34 Prices are collected in the kinds of retail outlets and other places where metropolitan households purchase goods and services. This involves collecting prices from many sources such as supermarkets, restaurants, department stores, schools and on-line websites.
CPI based on 900,000 price quotations each quarter
2.35 From the December quarter 2017, the ABS has introduced a new method to make greater use of transactions data in the CPI. This new method, known as a multilateral index method, utilises a census of products available in big datasets. This has resulted in a significant increase on the number of price observations used to compile the CPI. For further information on this change, see Information Paper: An Implementation Plan to Maximise the Use of Transactions Data in the CPI (cat. no. 6401.0.60.004). In total, almost 900,000 separate price quotations are now being collected each quarter.
2.36 Although the CPI is compiled quarterly, the frequency of price collection varies. Prices of goods and services that are considered to be volatile (i.e. likely to change more than once during a quarter) are collected more frequently. In the case of transactions data, revenue and quantity data are collected on a weekly basis. A small number of items are priced only once a year, either because that is the known frequency that prices are reviewed (e.g. council property rates) or because of seasonal availability (e.g. football matches). The general approach is to price each item as frequently as is necessary to ensure that reliable measures of quarterly price change can be calculated.
Prices collected are what people actually pay
2.37 The prices used in the CPI are those that any member of the public would have to pay to purchase the specified good or service. Any taxes levied on goods or services (such as the GST) are included in the CPI price. Similarly, prices are adjusted by any subsidy or assistance provided directly by the government (e.g. Child Care Benefit, Medicare). Sale prices, discount prices and 'specials' are reflected in the CPI so long as the items concerned are of normal quality (i.e. not damaged or shopsoiled), and are offered for sale in reasonable quantities. Any concessions available to particular groups of the population (such as age pensioners) are also taken into account where significant. Where an item is priced over the internet, any delivery or processing charges payable are included in the price.
2.38 To ensure that price movements are representative of the experiences of metropolitan households, the brands and varieties of the goods and services which are priced are generally those which sell in greatest volume.
CHANGES IN QUALITY
2.39 In concept, quality embraces all the attributes of an item which consumers would consider before making a purchase. For example in the case of tinned tomato soup, it would include the volume or weight of the contents, as well as the concentration and flavour.
Prices adjusted for changes in quality
2.40 As the CPI aims to measure pure price change over time, identical or equivalent items should ideally be priced in successive periods. However, products do change; their components or ingredients may change resulting in an improvement or degradation in quality. As the characteristics of products are altered, the statisticians responsible for the price index attempt to separate the effects of a quality change from any underlying price changes so that the CPI measures 'pure' price change. A simple example of quality adjustment is shown in paragraphs 2.52 to 2.54.
Quality change can be difficult to measure
2.41 The requirement to take account of changes in quality, to ensure that the index reflects only pure price change, often poses difficult measurement problems and in some cases is impossible in practice. For example, while it is easy to monitor changes in rail or bus ticket prices, it is difficult to attach a dollar value to changes in the quality (e.g. frequency or punctuality of the service).
REVIEWS OF THE CPI
CPI reviewed regularly
2.42 Like any other long-standing and important statistical series, the CPI is reviewed periodically to ensure that it continues to meet community needs. Beginning with the introduction of the 17th series in December quarter 2017, the CPI is reviewed on an annual basis in December quarters.
2.43 An important objective of these reviews is to update item weights to reflect changes in the range of available goods and services and changes in household spending patterns. They also provide an opportunity to reassess the scope and coverage of the index and other methodological issues.
2.44 Following these reviews, the new CPI series is linked to the old to form a continuous series. This linking is carried out in such a way that the resulting continuous series reflects only pure price change and not differences in the cost of the old and new baskets.
2.45 The index reference period for the CPI is also updated, but at less frequent intervals. Changes in index reference periods have no effect (other than rounding) on percentage changes, which are calculated from the index numbers.
Minor review conducted in 2017
2.46 The most recent 17th series review was a minor review of CPI, consisting of an update of the expenditure class weights in line with the 2015-16 HES, and a simple examination of structures and methodologies. For more information on the changes resulting from the 17th series review, see Information Paper: Introduction of the 17th Series Australian Consumer Price Index, 2017 (cat. no. 6470.0.55.001).
HOW DOES THE CPI RELATE TO ME?
CPI unlikely to reflect the price experience of individual households
2.47 The CPI is designed to measure changes in retail prices experienced by metropolitan private households in aggregate. The composition of the basket and the relative importance of items in it relate to this population group as a whole - it represents the expenditures of all inscope households, not the expenditure pattern of the average household or of any particular household type or size. The basket comprises all consumer goods and services acquired over a twelve month period. It includes items acquired infrequently by an individual household (e.g. major electrical appliances, new motor vehicles), items that are acquired almost daily by all households (e.g. bread and milk) and items that are only available at certain times of the year. The basket includes, for example, both rent payments of renting households and the amounts paid by owner-occupier households for the purchase of their principal residence - clearly no individual household can incur both expenses at the same time. Therefore, changes in the CPI are unlikely to reflect exactly the price experience of any particular household.
2.48 The CPI does not measure those changes in living costs which may be experienced by individual households as a direct consequence of their progression through the life cycle. For example younger households may incur a higher proportion of their expenditure on housing and child care while those households entering the older age groups may incur increasing expenditure on medical services. However, changes in the demographic make-up of households in aggregate and differences in expenditure patterns will affect the pattern of total household expenditure recorded in the HES. In turn, these changes will be incorporated in the weighting pattern in the CPI.
CPI cannot be used to measure price levels
2.49 The CPI is not designed to measure price levels; rather its purpose is to measure changes in prices over time. While price levels in country regions often differ from those in metropolitan areas (some higher and others lower), the factors influencing price movements generally tend to be similar. Therefore the CPI can be expected to provide a reasonable indication of the changes in prices in Australia as a whole over the longer term.
2.50 Similarly, the CPI cannot be used to compare price levels between capital cities. For example, the fact that the CPI All groups index in the December quarter 2017 for Melbourne (112.3) was higher than in Adelaide (111.2) does not indicate that Melbourne was more expensive to live in than Adelaide. Rather, it indicates that prices in Melbourne have risen more than in Adelaide since the reference period (2011-12).
2.51 At the end of the day, the CPI is most useful as an indicator of price movements, whether it be for specific items, a particular city, or the economy as a whole. The CPI is not a precise measure of individual household price experiences.
EXAMPLE: ADJUSTING FOR QUALITY
2.52 To illustrate the process used to adjust for changes in the quality of items priced in the CPI, consider the case of a change in the size of a can of tomato soup. In this example, Acme brand tomato soup is priced in three periods (1, 2 and 3) and the size of the can is reduced from 440gms to 400gms between period 2 and period 3:
Using the observed prices produces the following measures of price change:
Percentage change from period 2 to period 3 = (2.85 - 2.78)/2.78 x 100 = 2.5%
Percentage change from period 1 to period 3 = (2.85 - 3.09)/3.09 x 100 = -7.8%.
2.53 However, this does not provide a measure of 'pure price' change because the item priced in period 3 is not identical to the item priced in the previous periods. What is required for period 3 is the 'price that would have been paid for the item that was priced in period 2'. This price can be estimated by adjusting the period 3 price by the ratio of the item's weight in period 2 to its weight in period 3, giving a quality adjusted price of $3.14 ($2.85 x 440/400).
Using this adjusted price in period 3 results in the following correct measures of price change:
Percentage change from period 2 to period 3 = (3.14 - 2.78)/2.78 x 100 = 12.9%
Percentage change from period 1 to period 3 = (3.14 - 3.09)/3.09 x 100 = 1.6%.
2.54 After adjusting for the reduction in quality between periods 2 and 3, the rise in the observed price of 2.5% has been translated into a pure price increase of 12.9%. Similarly, the measure of price change between periods 1 and 3 has been changed from a fall of 7.8% to a rise of 1.6%.
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